MI 2022 PU3 Preliminary Examination Paper 2 QP

2022 Preliminary Examination Pre-university 3 PRINCIPLES OF ACCOUNTING 9593/02 Paper 2 20 September 2022 3 hours READ THESE INSTRUCTIONS FIRST An answer booklet will be provided with this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. Section A Answer all questions. Section B Answer all questions. Start each answer on a new page. You may use a calculator. All calculations must be shown adjacent to the answer. The number of marks is given in brackets [ ] at the end of each question or part question. ___________________________________________________________________________ This document consists of 6 printed pages and 1 blank page. [Turn over

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3 Section A Answer all questions in this section 1 Valore (Pte) Limited manufactures a component used in the production of mobile devices. Currently, it can produce a maximum of 10 000 units. They provided the following budgeted information. Per unit $ Selling price 40 Direct material 11 Direct labour 5 Total of semi-variable and fixed cost $ Factory costs for 5 000 units 35 000 Factory costs for 10 000 units 55 000 Fixed overheads 80 000 REQUIRED a Explain, with examples, what is meant by ‘fixed cost’ and ‘variable cost’. [4] b Calculate the break-even point in units for the company. [6] c Calculate how many units need to be produced and sold to earn a profit of $50 000. [2] d Discuss the limitations of using break-even analysis to make decisions. [4] Valore is currently operating at 70% capacity and has received an order for 2 000 units of the mobile phone component at a selling price of $25 per unit. REQUIRED e Should Valore accept the order? Why or why not? [4] [Total: 20]

4 [Turn over 2 Snuggy Limited has been in operation for many years. It makes a popular type of chair called Snoozy. The monthly budget for Snoozy is as follows. Sales are 6 000 units with a selling price of $26 per unit. Each unit requires 2.4 kilos of raw material costing $3 per kilo. Each unit requires 1.5 hours of direct labour time costing $7 an hour. Each unit requires $2 of variable overhead. Early in 2022 a new supplier entered the market, selling the required raw material at $1.80 per kilo. In April, Snuggy Limited bought all its raw material from this new supplier. Each unit of Snoozy required 2.6 kilos. Labour took 40% longer than usual to produce each unit. Average wage rate rose to $7.80 an hour. Variable overheads increased by 10% per unit. Snuggy Limited managed to produce and sell 5 000 units. The selling price rose by $0.50 per unit. REQUIRED a State two advantages and two disadvantages of preparing budgets. [4] b Prepare a flexible budgeted income statement for the month of April 2022 , showing clearly the contribution margin. [4] c Calculate the following variances for April 2022: i. Sales price ii. Direct materials usage iii. Direct materials price iv. Direct labour efficiency v. Direct labour rate [9] d Suggest how the direct material price variance could be linked to the direct material usage variance. [1] e Suggest how the direct material price variance could be linked to the direct labour rate variance. [2] [Total: 20]

5 3 Girona Wee is a professional accountant. She is suffering from stress and has been advised by her doctor to reduce her workload. Her income is loosely related to her reputation and the hours she spends working for clients. She employs two assistants, Ariel and Bart, and during recent years, her annual profits have averaged $180 750 calculated as follows: $ $ Income Girona: 800 chargeable hours at $300 240 000 Ariel: 1 300 chargeable hours at $200 260 000 Bart: 1 500 chargeable hours at $130 195 000 695 000 Less: Expenses Fixed occupancy and secretarial costs 245 000 Direct cost at 15% of income 104 250 Salary - Ariel 90 000 Salary - Bart 75 000 514 250 180 750 Girona spends 300 hours per year supervising Ariel’s work and 500 hours supervising Bart. Girona feels that to maintain a good standard of living, she would need an annual profit of $90 000. She considers she can implement any one of the following options. Option 1 Employ another assistant under the same conditio ns as Bart and reduce her chargeable hours to 100 per year. Option 2 Make Ariel redundant to save her supervision time. Option 3 Make Bart redundant, reduce her own chargeable hours to 400 each year and secure smaller and cheaper premises with occupancy and secretarial costs of $140 000 per year. REQUIRED a Calculate the profit arising from each of the three options above. [12] b Calculate the number of hours Girona will need to work either fee earning or supervising for each of the three options. [3] c Advise Girona on her best choice. Give reasons to support your answer. [3] d What other factors should Girona consider in choosing the option in (c) above? [2] [Total: 20] [Turn over

6 Section B Answer all questions 4 Kinetic Limited manufactures three different types of batteries, Alpha, Beta and Delta. The emergence of economies from the pandemic has give rise to an increase in forecasted demand for the firm’s products. The results for the year ended 31 August 2022 were as follows: Alpha Beta Delta Total Sales in units 1 000 4 000 2 000 7 000 $ $ $ $ Sales (value) 360 000 480 000 900 000 1 740 000 Direct materials 108 000 48 000 240 000 396 000 Direct labour 60 000 120 000 300 000 480 000 Variable overheads 132 000 216 000 168 000 516 000 Fixed allocated overheads 66 000 108 000 84 000 258 000 Total costs 366 000 492 000 792 000 1 650 000 Profit (Loss) (6 000) (12 000) 108 000 90 000 Fixed overheads are allocated in proportion to the products’ variable overheads. Sales in the year ending 31 August 2023 will be limited by the availability of local skilled direct labour of only 16 000 hours. The cost to the company of such labour is $30 per hour. In a meeting to discuss next year’s production, it was proposed to stop the production of Beta as the product line has made the most loss in the year ended 31 August 2022. At th at meeting, the sales director says that if prices remain unchanged, demand for all the company’s products will be 50% higher than 2022 levels. However, the managing director takes a different view, and he considers that the following actions should be taken immediately: 1 The loss on Alpha batteries would be eliminated if the selling price were reduced by 10%. This would lead to a doubling of sales volume which he says would more than compensate for the price reduction. 2 The selling price of Beta batteries should be increased by 20%. The effect of this would be to reduce sales by half and the resulting saving of labour should be used to produce the additional requirement for Alpha batteries. 3 No changes should be made to the production or sales of Delta batteries. To mitigate the shortage of labour, the production manager proposes to buy machinery which will reduce the company’s reliance on labour in its production. The machinery will cost $250 000 payable in full on the outset. It will last six years and then be sold for $ 30 000. To buy the machinery, a loan of $200 000 repayable in six years, will have to be taken.

7 If the machinery is purchased, cost savings of $9 5 000 per year from direct labour will result. Annual maintenance cost of $6 000 and annual interest costs of $20 000 per year will be incurred. These savings can be assumed to arise at the end of each year.